Tuesday, May 17, 2011

HP, IBM, and So On: It's Not the Personalities, People!

I note from various sources that some VSPs (Very Serious People, to borrow an acronym from Paul Krugman) are now raising questions about HP’s financials in the wake of Mark Hurd’s departure for Oracle. To cherrypick some quotes: “They need to .. regain investor confidence”; “HP is in a difficult situation”; “It sounds like … Hurd took too many costs out of [the services] business”; “HP … now … are known for inconsistency … It could become a value trap.” And, of course, there are comparisons with IBM, Dell, software vendors like Oracle, and so on.

I am certainly not an unalloyed HP booster. In fact, I have made many unflattering comparisons of HP with IBM myself over the years. However, I disagree with the apocalyptic tone of these pronouncements. In fact, I will stick out my neck and predict that HP will not implode over the next 3 years, and it will not fall behind IBM in revenues either, barring a truly epochal acquisition by IBM. I believe that these VSPs are placing too much emphasis on upcoming strategies bearing the imprint of personalities like HP’s Leo Aptheker and IBM’s Sam Palmisano, and not enough emphasis on the existing positioning of IBM, Dell, HP, Microsoft, Oracle, and Apple.

Let’s Start With the Negative!

So what are these problems that I have criticized HP for? Well, let’s start with its solution portfolio. Of the major computer vendors, HP may be the closest to a conglomerate – and that’s not a good thing. Let’s see, it has a printer/all-in-one company, a PC company, one or two server companies (including Tandem), a business/IT services/outsourcing company, and even, if you want to stretch a point, an administrative software utility company (the old SystemView) with some more recent software (Mercury Interactive testing) attached. Moreover, because HP has until very recently not tried very hard to stitch these together either as solutions or as a software/hardware stack, they are not as integrated as others – strikingly, not as integrated as IBM, which was once known for announcing global solutions whose components turned out to be in the early stages of learning to talk to each other. At first glance, HP’s endowments seem impressive; closer up, these seem, as someone once said in another context, like cats fighting in a burlap bag.

Moreover, HP, unlike any of the other companies I have mentioned except Dell, simply does not have software in its DNA. Back in the early 1990s, a Harvard Business Review article asserted that hardware companies at the time would suffer unless they became primarily services companies; I asserted then, and I assert now, that they also should become software companies.

I believe that this lack of software solutions and development personnel has several bad effects that have decreased HP’s revenues and profits by at least 20% over the last 20 years. Software development connects you with the open source community, the consumer market, and the latest technologies that impinge on computer vendors quite effectively. It allows your services arm to offer more leading-edge services, rather than trying to customize others’ software in a quick and dirty fashion for one particular services engagement. And, in the end, it moves hardware development ahead faster, as it focuses chip development on major real-world workloads that your software supports. Moreover, as IBM itself has proven, even if investment in software doesn’t pay off immediately, eventually you get it right.

A third, more recent problem, does relate to Mark Hurd’s cost focus – although the same might be said for IBM. A truism of business strategy proved by the problems created by CFO dominance at US car companies in the 1980s and 1990s is that too long a focus on the financials rather than product innovation costs a company dearly. It is quite possible that HP has eaten its innovation seed corn in the process of turning into a “consistent” money maker.

Finally, HP has in the past had a tendency in its hardware products to be “the nice alternative”: not locking you in or like Sun or Microsoft, willing to provide a platform for Oracle and Microsoft databases, open to anyone’s middleware. Whatever the merits of that approach, it creates a perception among customers that HP is not leading-edge in the sense that Apple, or even Microsoft and Oracle, are. Twenty-one years ago, in my first HP briefing, famous analyst Nina Lytton showed up in a brilliant pink outfit and immediately announced that HP’s strategy reminded her of a “great pink cloud.” That sort of rosy but not clear-cut presentation of one’s strategy and future plans does not create the sort of excitement among customers that Steve Jobs’ iPhone and iPad announcements, or even IBM’s display of Watson, do.

It Doesn’t Matter

And yet, when we look at HP vs. IBM in the longer run – from 1990, when I started as an analyst, to now – the ongoing success of HP is striking. At the start, IBM’s yearly revenues were in the $80s billion, and HP’s perhaps a quarter as much. Today, HP’s revenues are perhaps 1/3 greater, IBM at around a $100B run rate and HP perhaps at $135B. Some of that HP growth can be attributed to acquisitions; but a lot of it comes from growth of its core business and its acquisitions. To put it another way, IBM has been very successful at growing its profit margin; HP has been very successful at growing.

And growth at that scale is not easy. Companies have been trying to knock IBM off its Number 1 perch in revenues since the 1960s, and only HP has succeeded. Nobody else is in striking distance yet – Microsoft is at a $70B run rate, apparently, with seemingly no prospects of exceeding $100B in the next couple of years.

The reason, I think, is HP’s acquisition of Compaq back in the 1990s. Since then, having beaten back Dell’s challenge, HP is in a very strong position in the PC-form-factor scale-out markets. Despite recent apparent gains by System x, IBM focuses on the business market, and all of the other vendors mentioned above do not compete in PC hardware. Moreover, the PC market aligns HP with Intel and Microsoft, and thereby is relatively well protected from IBM’s POWER chips or even Oracle/Sun’s SPARC chipset, whatever life that has left in it (there is still no sign that AMD threatens Intel’s chip dominance significantly).

So let HP’s scale-up servers and storage falter in technology (e.g., the Itanium bet) relative to IBM and EMC, if they do; with the steady decrease in market share by Sun, HP is, and will in the short term remain, the IBM alternative in this market. Let Dell and IBM’s System x tout their business Linux scale-out prowess; the prevalence of existing scale-out PCs in public clouds and Microsoft LOBs means that HP is well positioned to handle competition in those areas over the next couple of years.And who else but IBM can attack HP? Oracle may talk big, but Sun’s market share appears to be shrinking, and 15 years of Larry Ellison talking about the virtual desktop and Oracle Database handling your filesystem have failed to make a dent in Windows, much less Wintel. Microsoft has no need to move into hardware, and apparently no desire. Apple appears to be playing a different sport altogether.

In fact, the only serious threat to HP over the short term is any major movement of consumers off PCs and laptops as they move to smartphones and tablets. Here again, I think, analysts are too apocalyptic. Yes, iPhones can handle an astonishing range of consumer tasks, but not as easily or in as sophisticated a fashion as PCs, and users still continue to want to create and organize personal stores of photos etc. as well as share them – something the smartphone does not yet do. Meanwhile, the tablet offers the small form factor and attractive user interface that today’s laptop does not; but it is more likely that the tablet will acquire PC features, than that it will morph into an iPhone.

And Whither IBM?

In fact, an interesting question, given IBM’s status as the most direct competitor of HP, is whether IBM can begin to speed up its revenue growth. IBM has been delivering strong financials for almost 20 years, while talking a good game about innovation. In fact, I would say that they have indeed been innovative in some areas – but not enough yet to grow their revenues fast. Will the big innovation be green technology? The cloud? Analytics? Because, let’s face it, the only two things that recently have delivered big revenue gains are cell phones and Web 2.0/social media – and Apple, Google, and Facebook are the ones reaping the most revenues from these, not IBM.

In fact, as I have argued, IBM can do quite well with its present strong position in scale-up, but it cannot dominate the business side of computer markets when HP, Microsoft, and Intel have such a strong position in scale-out, nor can it match HP in consumer markets – and these affect business sales.

User Bottom Line: Don’t Panic, Do Buy Both

It would be nice, wouldn’t it, to be back in the old days when no one ever got fired for buying IBM systems, or Oracle databases? Well, those days are gone forever, and no blunder or inspired move, by Aptheker, Palmisano, Hurd, Ellison, Ballmer, Dell, or Jobs, will bring them back.

Given that, the smart IT buyer will acquire a little of each, in the areas in which each is best. It is true, for example, that IBM has exceptional services scope that allows effective integration – including integration of scale-out technology from Microsoft, Intel, and HP, or for that matter (System x) from IBM itself. This “mixed” enterprise architecture is the New Normal; vendor lock-in or a tide of Web innovation fueled by an Oracle and a Sun is so 1990s.

It is said that when Mary Queen of Scots wed the King of France, she was saluted with: “Let others wage war; let you, happy Scotland, bear children” (it’s better in Latin). Let the VSPs and apocalyptic analysts assert that vendor personalities waging war should affect your buying decision; you, happy CIO, should buy products from any of the vendors mentioned above, without worrying that a vendor is about to go belly-up in two seconds. And the vendors that have the greatest ability to integrate, like IBM and HP, will do quite well if you do.

Wayne Kernochan

About Me

Presently President, Infostructure Associates, Wellesley, MA. Long-time computer industry analyst at firms like Aberdeen Group and Yankee Group, and before that a programmer at Prime Computer and Computer Corp. of America. Sloan/MIT MBA, Cornell Computer Science Master's, and Harvard college degrees. Used to play the violin, and wrote a book (unpublished) about personal finance.